SOL on tax refunds.

• Author: Holub, Steven F.
• Position: Statute of limitations

This column addresses some of the rules concerning the statute of limitations (SOL) on tax refunds. Basic guidance on the SOL is provided in Sec. 6511(a), "Limitations on credit or refund," which states:

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed of 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid....

Thus, generally, a taxpayer must file a refund claim within three years of the date he or she filed the return. However, in actual practice, many issues arise, including:

* What is a refund claim?

* Do the SOL rules apply only to income tax?

* When is a return deemed filed for purposes of the three-year rule?

* When is tax deemed paid for purposes of the two-year rule?

* What happens if a return is filed late?

* What happens if no return is filed?

* If a refund is barred pursuant to the rules, can an overpayment be applied to the next year?

* What happens if a taxpayer is unable to file a refund claim?

* How do these rules affect the use of net operating losses (NOLs)?

Refund Claim Defined

While a failure to use official refund claim forms (e.g., Form 1040X, 1120X or 843, Claim for Refund and Request for Abatement) is not necessarily fatal, the courts have not been liberal in sustaining informal refund claims; see Rock Island, A. & L.R. Co., 254 US 141 (1920), in which the Supreme Court disallowed a refund for failure to file a proper claim. Filing an official form is not absolutely required, but it is good practice. S corporations, partnerships and certain other taxpayers normally file an amended return, which serves as a refund claim. The claim must state the refund amount being sought, the year in which the tax was paid and the basis for the refund. It must be clear and concise to enable the Service to determine the merits of the refund request.

What Taxes Do the Rules Cover?

Because Sec. 6511(a) applies to "any tax imposed by this title" the three-and two-year time limits apply to income, excise, employment, estate and gift taxes. Clearly, a refund claim has two "time" rules; a taxpayer must file a claim within one of these or forgo a refund, regardless of the claim's merits. Sec. 6511(a) sets forth very specific time requirements. The...